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Purchasing link in a group of companies: is it necessary?

At a time when it was impossible to be 100% sure that suppliers were honest, that they would fulfill their tax obligations and not “disappear” by the time of the next field tax audit, it was very common to include “your” buffer in the group of companies, which pursued the main goal – not to allow the issues of relations with suppliers to the main operational link, whether it is the Plant or the Wholesale company.

We offer to understand how relevant this task is in the current realities, as well as in what other cases the “Purchase” link will take root in the group of companies.

Organizational Compliance
One of the justified reasons for the allocation of the procurement link is to bring the organizational and legal structures to a common denominator. This reason is relevant for a multidirectional business.

For example, activities are carried out in two areas: wholesale and retail. Two companies created. The assortment of goods is the same; it is purchased from the same suppliers with whom the centralized procurement department interacts. In this situation, purchasers may be employed in a wholesale company that resells the goods to a retail entity.

However, such an organization of the movement of goods causes a problem in terms of pricing between wholesale and retail. This point is important in terms of calculating the real profitability of directions.

Separation of a separate procurement link solves it, since both directions receive goods at suppliers’ prices, taking into account the objective costs incurred by the purchaser to fulfill their obligations.

Another example is the presence of several legally separate production lines, partially consuming the same raw materials and consumables.

When organizing a purchase through one of the manufacturers, the complexity of accounting is added to the above problems. After all, if you buy for one, then the party will have to be divided into accounts for “goods” and “materials”. Add to this the doubling of speed, constant resale. Pleasant not enough.

Of course, in the situations described, procurement can be carried out by each entity independently, however, this causes the need for part-time workers and deprives the business of perhaps the most important bonus of consolidated procurements – the provision of more favorable prices (long-term delay) due to the larger volume. In addition, in reality it is impossible to calculate in advance to whom how many specific goods, materials or raw materials will be needed.

The described examples are even more complicated when using group entities of different taxation systems. In this case, the issue of pricing is even more acute, since the tax authority will see a scheme in resale chains aimed at obtaining unjustified tax benefits. Whether it is the creation without VAT of the sales sleeve in trade or the overstatement of the cost of production costs. At the same time, there may not be a scheme and tax benefit at all, however, increased inspection attention is guaranteed.

Of course, the procurement link in this case is not a panacea, but it solves the pricing problem as a whole.

In this case, another question arises – the compliance of the tax burden indicators of the procurement link with the industry average. If these indicators will deviate significantly from the norm, which primarily depends on pricing, the taxpayer will have to answer the relevant questions of the tax authority.

Risk diversification
Another objective of the procurement link is risk diversification. Let’s start with the entrepreneurial. Imagine the situation: the company operates in an area in which suppliers of raw materials cannot ensure the stable quality of the supplied products. On this basis, disputes arise over the acceptance of raw materials and their payment. With the prospect of litigation.

How will the presence of lawsuits against her for non-payment of delivered goods affect the company’s image? When working with large customers, such claims will complicate cooperation, especially if the conclusion of the contract is built through tenders, which take into account the presence of claims and claims against the applicant.

Breeding purchases and sales by different legal entities solves this problem.

Tax security
Let’s talk about tax risks in the field of VAT. As we noted at the very beginning, often procurement links are created precisely in order to transfer risks from the main company to the buffer. Is this an effective mechanism today?

On the one hand, the main operating company has one stable supplier that fully confirms the relationship. On the other hand, there are situations in which the IFTS additionally charges taxes, bypassing intermediaries, essentially blaming the taxpayer for the gap in tax payments on the second and subsequent links.

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